A Little Bit of Guidance on SE Taxation of Limited Partners
The Tax Court provided some additional guidance on self-employment taxation of limited partners in the Soroban Capital Partners case issued on Tuesday November 28, 2023.
For many years we have suggested that taxpayers utilize a manager-managed LLC to save on self-employment taxes instead of using an S corporation. An S corporation has many drawbacks that an LLC taxed as a partnership does not have such as:
No step-up in basis of the entity’s assets when passing through an estate. The S corporation stock gets a step-up, but the assets held by the corporation retain their current tax cost basis which in most farm S corporations is zero. The member’s interest in the LLC taxed as a partnership will get a step-up under Section 743(b) and this allows the heirs to get a full deduction for those assets (either immediately or through depreciation).